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The government
has introduced a trilogy of bills, which combine to replace the
current private health insurance incentives initiative with another
incentives payment scheme aimed at reducing the decline in private
health insurance membership and restoring the balance in the health
system.

The incentive will be equal to 30% of the cost
of private health insurance cover and will not be income
tested.

The Private Health Insurance Incentives Bill
1998 introduces incentives in the form of either direct payments or
reduced premiums.

The Private Health Insurance Incentives Bill
1998 is complimented by the introduction of the Taxation Laws
Amendment (Private Health Insurance) Bill 1998 (the Bill), which
provides an alternative incentive in the form of a tax offset
(rebate).

The Private Health Insurance Incentives
Amendment Bill 1998 completes the reform package by providing for
the closing off of the current Private Health Insurance Incentives
Scheme (PHIIS) and the repeal of the Private Health Insurance
Incentives Act1997 on 1 July 2000.

The current PHIIS has operated from 1 July 1997.
The benefit is provided by way of either reduced premiums or tax
offset. The scheme is income tested and is therefore not available
to singles with incomes above $35,000 nor couples or families with
combined incomes in excess of $70,000. The threshold is increased
for those with dependent children.

The current incentive amount is dependent upon
the type of policy held, but a guide to the benefits available
would be $250.00 to a couple with hospital and ancillary cover and
$450.00 for families.

There have been dramatic changes in the
proportion of the population covered by private health insurance
over the last decade or so. In relation to hospital cover, at 30
June 1984, 50.0% of the population had private health cover. In
1998 coverage had fallen to 30.6%.

In 1996 the coverage was 33.6% and in 1997
31.9%. The 1998 figures showed a continued decline in membership to
30.6% but the rate of decline had apparently slowed.

Background - Income Tax
Assessment Acts 1936 and 1997

For many years the income tax law has been
widely criticised for being too difficult to read and understand.
The complexity of the law has increased the costs of taxpayer
compliance and government administration.

From 1 July 1994 the Tax Law Improvement Project
was established to restructure, renumber and rewrite the income tax
law so that it can be more easily understood. The project has taken
longer than expected and consequently the Tax Law Improvement
Project team has chosen to adopt a 'progressive replacement'
approach to the rewrite. This means that when an instalment of
rewritten law comes into effect, the rest of the existing law
(minus those areas that have been rewritten) continues to operate
along side the new law.

The existing law is the Income Tax
Assessment Act1936 (ITAA 1936). The new law is the
Income Tax Assessment Act1997 (ITAA 1997).

The ITAA 1997 is organised on a descending
hierarchy numbering system of Chapter -Part-Division-Section.
Section numbers are cited with two components separated by a dash
as in 'section 43-20'. The first component is the number of the
division and the second identifies the section in that
division.

The ITAA 1997 contains a provision, section 1-3,
which is designed to preserve the relevance of existing case law
and ATO rulings.

The coexistence of ITAA 1936 and ITAA 1997 often
means that amendments to the law necessarily involve amendments to
both Acts. That is the case with this Bill.

The amendments contained in Schedule 2 to the
Bill will insert new subdivision 61-H in the ITAA
1997 to provide a private health insurance offset complementary to
the Private Health Insurance Incentives Bill 1998 and make other
consequential amendments necessary to make the offset a refundable
tax offset.

Schedule 1 makes consequential amendments to
ITAA 1936.

2. Schedule 2 - Amendment of the
Income Tax Assessment Act 1997

2.1 Tax offsets

A tax offset is an amount that is to be
subtracted from the tax otherwise payable. In contrast a deduction
is subtracted from assessable income in calculating the taxable
income on which tax is payable.

The term 'tax offset' is a generic term used in
ITAA 1997 to describe what in ITAA 1936 are called rebates and
credits.

The sum of all tax offsets allowable to a
taxpayer cannot exceed the amount of tax otherwise payable and any
unused offsets cannot be carried forward to be set off against tax
payable in future years. Nor can offsets be used to reduce the
Medicare Levy.

Item 11 of Schedule 2
introduces new subdivision 61-H which permits a
person to choose a tax offset for a premium, or an amount in
respect of a premium, paid under a private health insurance policy
instead of receiving payments or reduced premiums under Chapters 2
or 3 respectively of the Private Health Insurance Incentives Bill
1998.

2.2.1 Entitlement

New section 61-335 states that
a person is entitled to a tax offset for the 1998-99 income year or
a later income year if:

the person has paid a premium under an appropriate private
health insurance policy; or

an employer has paid, as a fringe benefit, a premium for the
person under an appropriate private health insurance policy.

A person is not entitled to an offset if the
premium paid by the person has already been reduced pursuant to the
premiums reduction scheme(1) or if the person has received an
amount under the incentives payment scheme.(2) New
subsection 61-335(5)

New section 61-340 determines
the amount of the offset. Basically the amount is the greater
of:

30% of the amount of the premium paid by the person or by the
person's employer as a fringe benefit on behalf of the person for
the income year; or

the incentive amount for the policy for the income year.

It should be noted that if a person was not
registered or eligible to apply for registration before 1 January
1999 under the Private Health Insurance Incentives Act1997 in respect of a policy for the 1998-99 income year,
the amount payable is 30% of the amount of the premium paid by the
person or the person's employer.

2.2.3 Incentive Amount

Again new section 61-345, which
sets out the incentive amount for the purposes of new
section 61-340, mirrors the comparable provisions in the
Private Health Insurance Incentives Bill 1998.The incentive amount
is worked out in accordance with the following table.

Item

Number and kinds of people covered by the
policy

Policy provides hospital cover but not ancillary
cover

Policy provides ancillary cover but not hospital
cover

Policy provides combined cover

1

3 or more people

$350.00

$100.00

$450.00

2

One dependent child and one other person

$350.00

$100.00

$450.00

3

2 people neither of whom is a dependent child

$200.00

$50.00

$250.00

4

One person

$100.00

$25.00

$125.00

A pro rata daily rate formula applies to work
out a part year incentive payment.

2.2.4 Refundable tax offset rule

Pursuant to new section 67-25
the amount of the offset is a refundable offset.

The Bill introduces a new concept of refundable
offsets into tax legislation. At the moment the only offsets
proposed to be refundable are the private health insurance tax
offset and dividend imputation credits.

Essentially if the private health insurance tax
offset exceeds the tax assessed the outstanding balance or surplus
is passed on to the person by way of refund.

If a person has entitlement to tax offsets of a
lower priority (and all tax offsets are deemed to be of a lower
priority than the private health insurance tax offset under
new subsection 67-25(2)) these must be subtracted
from the person's tax payable first. Then, the amount of the
private health insurance tax offset is next subtracted from any tax
payable still outstanding. Finally a payment equal to the amount of
the private health insurance tax offset which exceeds the amount of
remaining tax payable is refunded to the person. New
sections 67-25 and 67-30.

3. Schedule 1 - Amendment of the
Income Tax Assessment Act 1936

Schedule 1 makes consequential amendments to the
ITAA 1936 including the insertion of newsection 264BB whereby the Commissioner may require
health funds to provide information relevant to the operation of
the Act in respect of each person covered at any time during the
financial year by an appropriate private health insurance
policy.

The Private Health Insurance Incentives Bill
1998 establishes a scheme under which persons are entitled to an
incentive payment by way of direct payment or reduced premiums. The
payment generally represents the greater of 30% of the amount of
premium paid or an incentive amount which is predetermined.

Please refer to the Bills Digest in respect of
the Private Health Insurance Incentives Bill 1998 for further
detail.

Schedule 1 provides transitional provisions that
permit the closing off of the current PHIIS and Schedule 2 provides
for the repeal of the Private Health Insurance Incentives
Act 1997 from 1 July 2000. This should permit finalisation of
administrative matters associated with the current scheme.

Please refer to the Bills Digest in respect of
the Private Health Insurance Incentives Amendment Bill 1998 for
further detail.

New section 67-20 states that
the refundable tax offset rules only apply to a tax offset if it is
stated to be subject to the refundable tax offset rules.

The Note to new section
67-20 states that the only tax offset that is subject to
these rules is the private health insurance tax offset under
new subdivision 61-H.

The inclusion of this note may be queried given
the government's proposal(3) to reform the taxation of business
entities. A key feature of the redesigned company taxation
arrangements would include the refunding of excess dividend
imputation credits for resident individual taxpayers and complying
superannuation funds.

Lesley Lang
23 November 1998
Bills Digest Service
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